Alitalia SpA, which loses more than $1.6 million a day, moved closer to bankruptcy after Air France- KLM Group broke off takeover talks, scuttling a 15-month effort by Italy to find a buyer for the airline.

Air France ended negotiations three hours before a midnight deadline, rejecting counter-proposals by Alitalia's unions as incompatible with its offer. Italian Finance Minister Tommaso Padoa-Schioppa said yesterday Alitalia might need to apply for protection from creditors if the bid failed. The government will seek to check the talks are "definitively" over, it said today.

"Unions put the agreement in jeopardy," said Patrizio Pazzaglia, who helps manage the equivalent of $400 million at Bank Insinger de Beaufort NV in Rome. "The company still has some cash and can sell some real estate assets, but it's left alone to its financial crisis."

Alitalia said Jan. 30 it needed to raise 750 million euros by mid-year to stay in business. The Rome-based company's fate is complicated by Italian elections April 13-14 to replace the government of Prime Minister Romano Prodi, who had backed the Air France offer. The carrier also lacks a top executive after Chairman Maurizio Prato quit yesterday after the talks collapsed.

"The scenario we see opening up before us is bankruptcy," said Carlo Luoni, a fund manager at 8A+ Sgr SpA in Varese, Italy, who manages $180 million. "The only positive is that with elections so close, things are likely to stall for a few days. This may give Air France time to think about it and come back."

Air France Gains

Air France, Europe's biggest airline, rose as much as 1.06 euros, or 5.6 percent, to 19.95 euros and was trading at 19.51 euros as of 1:51 p.m. in Paris. The stock is down 19 percent this year, giving a value of 5.85 billion euros ($9.1 billion).

"It's good news for the short term because of the financial burden Alitalia represented," said Laurent Vallee, a fund manager at Richelieu Finance in Paris, which manages $6.2 billion. "For the longer term, the offer would have reinforced Air France's leadership status in Europe and given it a greater presence in Italy. It's a missed opportunity."

Alitalia's shares and convertible bonds were suspended in Milan pending a statement, the Italian exchange said today on its Web site. The stock is down 38 percent for the year, valuing the company at 693 million euros.

Berlusconi Criticism

Former Prime Minister Silvio Berlusconi, who leads in opinion polls, has criticized the Air France bid and today renewed an appeal to the Italian business community to make a rival offer.

"We cannot give up our flagship carrier," Berlusconi said in Rome during a campaign speech.

Minister Padoa-Schioppa told parliament yesterday that a new offer was unlikely. Alitalia may be forced to use a special bankruptcy law adopted at the time of the 2003 collapse of dairy company Parmalat SpA, he said. The measure would protect Alitalia from creditors, while requiring "a more radical restructuring" than proposed by Air France, Padoa-Schioppa said.

European rules bar the Italian government from offering a bailout to Alitalia to stave off bankruptcy.

"It cannot receive any more state aid" European Commission transport spokesman Michele Cercone told reporters today in Brussels. "This is crystal clear."

Job Cuts

Air France's proposal valued Alitalia at 10 cents a share, 80 percent less than its price when the bid was presented. The bid called for 2,100 jobs cuts, eliminating Alitalia's cargo business, scaling back its maintenance unit and eliminating some medium-range jets before adding long-range planes.

Unions said in their counter proposal that they would support job cuts if the Paris-based carrier agreed to keep Alitalia's entire ground service and maintenance business, AZ Servizi. The unions, in a statement released in Rome, also called on Air France to limit the reduction in medium-range jets and speed the addition of long-range aircraft included in Air France's takeover offer.

In buying Alitalia, Air France-KLM would have won access to one of Europe's biggest passenger markets, while inheriting an airline that hasn't made money in almost a decade and has had nine government-appointed chief executives in the past 15 years.

Air France Chairman and Chief Executive Officer Jean-Cyril Spinetta indicated last night that he still saw merit in a merger with Alitalia.

"I regretfully acknowledge the breakdown in negotiations, which is none of our doing," he said in a statement. "This is a project I have profoundly believed in and continue to do so, because it would have ensured Alitalia a rapid return to profitable growth."

Lufthansa, Aeroflot

German airline Deutsche Lufthansa AG may be considering an offer for Alitalia after pulling out of the bid process in December, Il Messaggero reported today, without saying where it got the information.

"Lufthansa decided previously not to make a non-binding offer," said Claudia Lange, a spokeswoman for the Cologne-based carrier. "Italy remains an interesting market for us and we remain open to opportunities there but nothing has changed in our previous assessment."

OAO Aeroflot may also be interested in participating in a new auction, news agency Radiocor said yesterday, citing a spokesman. The Russian carrier quit the bidding in November.

Alitalia is a member of Air France's SkyTeam alliance. The French carrier holds 2 percent of Alitalia, which was slated to take part in the merger of Air France and KLM in 2004, but was excluded because of its mounting losses.

Alitalia shares have fluctuated by more than 10 percent a day since the Air France offer was presented on March 16. The stock closed 5.7 percent lower in Milan trading yesterday at 50 cents after rising 10 percent earlier in the session.

Prodi's government chose Air France to enter exclusive talks in December, saying their bid was superior to an offer by Alitalia's domestic rival Air One SpA backed by Intesa Sanpaolo SpA, Italy's second-biggest bank. The Prodi government first tried to sell its stake in Alitalia at the end of 2006 after abandoning attempts to turn the company around.